Edgar Feige on currency hoarding

I did my dissertation on currency hoarding back in the early 1980s.  At the time I argued that most currency was held in the US.  Later researchers argued that most US currency is held overseas.  Now Edgar Feige has re-examined the data and finds that most currency is indeed held in the US, often for purposes of tax evasion:

The rapid growth of substitutes for cash, particularly debit and credit cards, has led economists to predict the advent of the “cashless society”. Yet cash holdings in most developed economies continue to grow and in the U.S., per capita currency holdings now amount to $3000. This paper revisits the long-standing controversy concerning the whereabouts of U.S. cash. Specifically, we employ a previously confidential data source on net shipments of U.S. currency abroad to re-estimate the fraction of U.S. currency held overseas. Contrary to the widely cited figure that 65 percent of U.S. currency is abroad, we now find that direct evidence supports the notion that overseas holdings amount to less than 25 percent. Currently, the official figure for the percent of U.S. currency held abroad as published by the Federal Reserve in their Flow of Funds Accounts and by the Bureau of Economic Analysis in the U.S. Balance of Paymen ts Accounts is 37 percent. This official figure is a proxy variable that is supposed to mimic the previously confidential data series maintained by the New York Federal Reserve. Judson (2012) made this series public enabling us to discover that the official estimates of currency abroad require downward revision to reflect accurately the newly released data on actual cash shipments abroad. We also review the “indirect” approaches to estimating the fraction of currency overseas employed by Porter and Judson (1996) and Judson (2012). We find that these indirect methods to be innovative but deeply flawed due to violations of their restrictive assumptions. Moreover, sensitivity analysis reveals the estimates highly sensitive to alternative specifying assumptions. We conclude that the large estimates of currency abroad obtained by these methods are spurious. The paper also examines the temporal pattern of overseas holdings of U.S. currency and finds that the observed decline in the demand for U.S cash abroad coincides with the growing popularity of the Euro and its growth as a second currency held outside the Euro area between 2003 and 2008. These new findings have significant implications for estimating the domestic money supply and other domestic monetary aggregates; for estimating the net benefits of seigniorage earnings of the Federal Reserve; for forecasting changes in output and prices and for estimating the amount of unreported income and tax evasion in the U.S.

Update:  Bruce Bartlett sent me this email message in June:

I was at the Fed today and spoke to the chairman for a few moments. I brought the post you said you wanted him to see. He said he didn’t need it; he was quite familiar with your work. He mentioned NGDP specifically. He says he remembers you from when you were both working on the Great Depression at the same time. Since Bernanke wouldn’t take your post, I gave it to Jay Powell, a new member of the board.

I recently asked him if it was OK to put this message in my blog.  He said it was, and added:

I would just add that I had the definite sense from his comment that he was familiar with your current work, either by reading it himself or having someone on the staff following it for him.


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17 Responses to “Edgar Feige on currency hoarding”

  1. Gravatar of JL JL
    5. November 2012 at 07:13

    Well, which post did you want Ben Bernanke to see?

  2. Gravatar of Major_Freedom Major_Freedom
    5. November 2012 at 08:21

    Earnings in a legal tender commodity that is as not easily taxable can be worth more than earnings in a legal tender commodity that is more easily taxable.

    Since paper dollar currencies cannot trade at a relative premium to digital dollar currencies, due to legal tender laws, a form of Gresham’s Law comes into effect, namely, “good” money (cash) is driven out of general circulation and “bad” money (digital accounts at banks) remains in general circulation.

    I say “can be” because there are other factors that result in valuations in the reverse direction, e.g. it is less convenient to carry physical cash than it is to carry ATM cards, etc.

    ——————

    On a historical note, Gresham’s Law came into effect in the late 18th century US when the state (at the proposal of Alexander Hamilton) enforced bimetallism in the Coinage Act of 1792, in which they set an artificial exchange ratio between gold and silver of 15:1 (later 16:1).

  3. Gravatar of David Beckworth David Beckworth
    5. November 2012 at 08:33

    Scott, the Feige paper helps resolve something that always bothered me. I have worked with the Flow of Funds data on currency overseas and always wondered why it was so much less than the 65% number. This paper says that number is overstated. Interesting.

    Good to know Bernanke is keeping up with your blogging. Talk about influence!

  4. Gravatar of Saturos Saturos
    5. November 2012 at 08:39

    The plot thickens…

  5. Gravatar of Saturos Saturos
    5. November 2012 at 08:40

    So is this going to be a murder mystery, or is Scott going to tell us which paper it was?

  6. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    5. November 2012 at 09:34

    Et tu, Boris?

    http://www.telegraph.co.uk/news/politics/labour/9655358/Boris-Johnson-joins-Labours-calls-for-living-wage.html

    ————-quote————-
    Boris Johnson has joined Labour’s calls for businesses voluntarily to pay higher wages, as people need to earn at least £7.45 an hour to have a decent quality of life.

    The wage needed to keep up an “acceptable” standard of living has risen from £7.20 to £7.45 in the last year, according to experts. In London, it rose from £8.30 to £8.55, because of the higher cost of living in the capital.

    The London Mayor, who is tipped as a future Conservative leader, urged businesses to “wake up to the huge benefits that paying the living wage delivers”.
    ————–endquote—————

    Are there fifty pound notes sitting on London sidewalks?

  7. Gravatar of W. Peden W. Peden
    5. November 2012 at 10:08

    Interesting points all.

    MF,

    I’ve come to think that we shouldn’t even talk about “Gresham’s Law” at all. There is only what basic economics tells us about price controls, applied to the field of money. I can’t think of any special properties of money in this regard that distinguish it from, say, a barter price control that legally required the exchange at par of notebooks and pieces of slate. In either case, one gets a surplus of what people least want to hold.

    Bad money doesn’t drive out good money in a market. In fact, as Zimbabwe suggests, the exact opposite is true. So, given that Gresham’s Law has acquired this meaning, let’s stop talking about Gresham’s Law and just say “price controls create surpluses and shortages when they are different from what the market would charge”.

  8. Gravatar of Scott Sumner Scott Sumner
    5. November 2012 at 10:55

    JL, This on:.

    https://www.themoneyillusion.com/?p=14812

    BTW, Bruce Bartlett asked me for a post, as he said he would be visiting Bernanke. I certainly wouldn’t send Bernanke a post on my own, rather I responded to a request from Bartlett.

    Ironically Bernanke said he already knew about my NGDP ideas, but this specific post was for a non-NGDP target, which I thought might be more politically feasible.

    Patrick, I like the guy, but it looks like economics is not his strong suit.

  9. Gravatar of Major_Freedom Major_Freedom
    5. November 2012 at 11:22

    W. Peden:

    I’ve come to think that we shouldn’t even talk about “Gresham’s Law” at all. There is only what basic economics tells us about price controls, applied to the field of money. I can’t think of any special properties of money in this regard that distinguish it from, say, a barter price control that legally required the exchange at par of notebooks and pieces of slate. In either case, one gets a surplus of what people least want to hold.

    Gresham’s Law is a law that concerns “basic economics, as applied to money.”

    If notebooks and slates were universally accepted in barter, i.e. they are money, then if the state enforced a non-market par exchange rate between notebooks and slate, then it would result in the relatively over-valued good (slate, I am guessing) “driving out” the relatively under-valued good (notebooks, I am guessing), such that people would hoard the notebooks and trade away any slate.

    Because of the price controls, the bad drives out the good. That’s Gresham’s Law in a nutshell.

    I don’t understand why you believe we shouldn’t talk about Gresham’s Law, when your explanation of basic economics applied to money IS Gresham’s Law.

    Bad money doesn’t drive out good money in a market.

    Bingo. That’s a major implication of Gresham’s Law! Gresham’s Law has the incredibly important (and oft overlooked) caveat that the state is enforcing a non-market exchange rate. I gave an example of bimetallism, and you gave an example of notebooks and slate.

    Without that state intervention, then you’re right, bad money will not drive out the good. The bad will simply trade at a discount to the good.

    In fact, as Zimbabwe suggests, the exact opposite is true. So, given that Gresham’s Law has acquired this meaning, let’s stop talking about Gresham’s Law and just say “price controls create surpluses and shortages when they are different from what the market would charge”.

    Well, Gresham’s Law still includes the caveat that the state is enforcing a compulsory non-market exchange rate. If you think it is better to talk about price controls, then so be it.

    In fact, it may be particularly well suited to showing how state monopoly on money production, i.e. what is currently imposed on us now, leads to surpluses and shortages of money vis a vis non-money production.

    When the state monopolizes a currency, it does not operate according to market signals, and is setting de facto price controls on the exchange rates between money vis a vis real goods. The market of producers do not determine the money supply, the state determines it. The state’s decision making is necessarily non-market. It cannot know the correct non-surplus and non-shortage generating production of money, because such information is only borne out of the market process itself, which does not exist in state enforced monopolies.

    De facto price controls on the exchange rates between money and real goods, therefore, leads to that which is artificially undervalued to be driven out of the market and replaced by that which is relatively over-valued.

    Imagine if the thousands upon thousands of foreign exchange speculators, currency traders, central bank economists and logistics employees, domestic police forces that enforce the fiat money system, and other traders whose positions pop up because of fiat money, and especially monetarist bloggers, all devoted their labor to the production of real goods instead, and left the production and distribution of money to gold/silver miners and warehouse owners. A lot of resources and labor would be more productively utilized.

  10. Gravatar of Major_Freedom Major_Freedom
    5. November 2012 at 11:24

    Sorry, W. Peden. Bad italicizing. Hope you can discern what is mine and what is yours.

  11. Gravatar of marcus nunes marcus nunes
    5. November 2012 at 11:28

    So Bernanke didn´t want to hold the “hot patatoe” in his hands!

  12. Gravatar of W. Peden W. Peden
    5. November 2012 at 11:36

    MF,

    All agreed. My point is not that Gresham’s Law is wrong, but that it’s been so frequently mis-stated that people have come to attach it with the proposition that “bad money drives out good money”, always and everywhere, and so use it to deduce false propositions e.g. that in a free market for money the most inflated currency would be the currency in circulation.

    This would be a problem, if it wasn’t for the fact that we already have a more general term for the process that’s involved in Gresham’s Law: price controls.

  13. Gravatar of Major_Freedom Major_Freedom
    5. November 2012 at 12:41

    W. Peden:

    My point is not that Gresham’s Law is wrong, but that it’s been so frequently mis-stated that people have come to attach it with the proposition that “bad money drives out good money”, always and everywhere, and so use it to deduce false propositions e.g. that in a free market for money the most inflated currency would be the currency in circulation.

    Isn’t that precisely how good knowledge is lost, and isn’t that what prevents constant, perpetual knowledge acquisition from taking place?

    Appealing to the lowest common denominator? Allowing the bottom of the barrel to dictate intellectual discourse?

    If Gresham’s Law is misunderstood, then I say USE IT AND EXPLAIN IT MORE OFTEN.

    For what would you do if your “basic economics” explanation, which was presented as a solution to misstated Gresham’s Law, was itself misstated and people came to attach it with a particularly bad universal proposition? Would you then dumb down your explanation once more, and then again and again, until there is no subtlety left, and we’re all just grunting like chimps?

    At some point you have to say enough is enough, and not worry about idiots all the time.

  14. Gravatar of Bruce Bartlett Bruce Bartlett
    5. November 2012 at 13:37

    Bernanke’s waving away of Scott’s email printout wasn’t in the sense of not wanting to touch a hot potato, but more in the sense that he had no need for it since he was already familiar with his work.

  15. Gravatar of marcus nunes marcus nunes
    5. November 2012 at 14:59

    OK, so he was “ungracious”!

  16. Gravatar of W. Peden W. Peden
    5. November 2012 at 15:45

    MF,

    A legitimate concern, but I think it would be harder for people to misunderstand all of price theory than a particular application. Then again, as you say, the line has to be drawn somewhere.

    It is certainly how good knowledge is lost: just look at Say’s Law.

  17. Gravatar of Scott Sumner Scott Sumner
    6. November 2012 at 08:12

    Marcus, I wouldn’t read too much into that.

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